Topic 10 Flashcards
(19 cards)
The exchange rate
The price of one currency expressed in terms of another currency.
Commodity currency
The currency expressed in one whole unit (1)
Term currency
The currency for which an amount is exchanged for one unit of the commodity.
2 ways exchange rates can be quoted
- Directly.
2. Indirectly.
Direct quote
The domestic currency is used as the term.
Indirect quote
The foreign currency is used as the term.
Spot rate
The exchange rate quoted for immediate settlement (to trade right now) of the commodity currency.
Bid:
What the quoting party will buy the commodity at.
Ask
What the quoting party will sell the commodity at.
Bid-ask spread
The difference between bid and ask prices.
Why is the bid always lower and the ask always higher?
As a dealer, you must make money, and it’s always from a dealer’s perspective.
E.g. Yen/AUD: 80/85 you need to buy Yen, the commodity currency is AUD. What does the dealer buy it and then sell if for?
Buys $1 of AUD for 80 yen, then sells that to someone else for 85 yen. Dealer buying for 80, customer selling for 80.
Then dealer selling for 85, customer buying for 85.
The FX market
Where currencies are exchanged for others in a 24/7, decentralised, globalised market.
Can currency be physically and electronically traded? How does this contrast with the stock exchange?
Yes.
All buyers and sellers congregate in one location within trading hours.
The Eurocurrency market
Eurocurrency is deposited in a bank or is traded outside its country of origin.
Foreign exchange risk
Uncertainty in the value of foreign currency payments and earnings; arising from unexpected appreciation or depreciation of the foreign currency in relation to domestic currency or vice versa.
How exporters face FX risk (3)
- Goods and services sold to foreign buyers are often paid for in a foreign currency.
- The foreign currency income has to be converted back to the domestic currency to pay for local operational expenses and capital costs.
- Unexpected changes in the value of the domestic currency can result in more or less domestic income when conversion occurs.
When does the exporter benefit?
When the foreign currency appreciates; he is selling the foreign currency, the value increases, so he receives more money.
What will countries that want to support their exports do?
They will depreciate/maintain low levels of their currency
